The $821 Million Smile

By Terrance Heath

August 6th, 2008 - 10:43am ET

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Why is this man smiling?

His name is Richard Syron, CEO of mortgage giant Freddie Mac.

His company just posted an $821 million loss.

For the second quarter, McLean, Virginia-based Freddie Mac reported a loss of $821 million, or $1.63 cents per share, compared with a profit of $729 million, or 96 cents per share, a year earlier.

That included the first loss from its holdings of subprime and other risky loans, which formed a significant part of its $2.8 billion in realized and anticipated losses stemming from the steepest U.S. housing downturn since the Great Depression.

This, after the Freddie CEO ignored warnings that could have prevented some of those losses.

The chief executive of the mortgage giant Freddie Mac rejected internal warnings that could have protected the company from some of the financial crises now engulfing it, according to more than two dozen current and former high-ranking executives and others.

That chief executive, Richard F. Syron, in 2004 received a memo from Freddie Mac’s chief risk officer warning him that the firm was financing questionable loans that threatened its financial health.

Today, Freddie Mac and the nation’s other major mortgage finance company, Fannie Mae, are in such perilous condition that the federal government has readied a taxpayer-financed bailout that could cost billions. Though the current housing crisis would have undoubtedly caused problems at both companies, Freddie Mac insiders say Mr. Syron heightened those perils by ignoring repeated recommendations.

But you'd smile, and maybe even ignore warnings too, if you knew you'd be bailed out at taxpayer expense. And bailed-out unconditionally. (Never mind that some of those taxpayers will struggle to heat their homes this winter, if they're lucky enough to still have homes. Never mind that the same Congress that bailed you out pretty much left them in the cold.)

The House dealt Fannie Mae (FNM) and Freddie Mac (FRE) a "Get Out of Jail Free" card on July 23, passing a bill that authorizes the Treasury Dept. to extend the mortgage-finance giants a lifeline without any of the conditions that the companies' critics had demanded. The bill now heads to the Senate, where passage is expected within days. President Bush earlier dropped his threat to veto the legislation, so it should be signed into law soon.

...The House accepted Treasury Secretary Henry Paulson's request to let his department extend unlimited amounts of credit to Fannie and Freddie if need be. It also authorized Treasury to buy shares in the companies to bolster their capital bases. Paulson had argued forcefully that making the line of credit unlimited and having authorization to buy their shares would discourage short sellers from mounting attacks on the companies. He likened it to a bazooka that scares off enemies even if it's never used.

You'd smile too if you could lose $821 million, and get bailed-out with no accountability.

Second, there should be full accountability. Those who are responsible for the mistakes – management, shareholders and bondholders – should all bear the consequences. Taxpayers should not be asked to pony up a penny while shareholders are being protected.

Finally, taxpayers should be com­pensated for the risks they face. The greater the risks, the greater the compensation.

All of these principles were violated in the Bear Stearns bail-out. Shareholders walked away with more than $1bn (€635m, £500m), while taxpayers still do not know the size of the risks they bear. From what can be seen, taxpayers are not receiving a cent for all this risk-bearing. Hidden in the Federal Reserve-collateralised loans to ­JPMorgan that enabled it to take over Bear Stearns were almost surely interest rate and credit options worth billions of dollars. It would have been easy to design a restructuring that was more transparent and protected taxpayers’ interests better, giving some compensation for their risk-bearing.

But the proposed bail-out of Fannie Mae and Freddie Mac makes that of Bear Stearns look like a model of good governance. It sets an example for other countries of what not to do. The same administration that failed to regulate, then seemed enthusiastic about the Bear Stearns bail-out, is now asking the American people to write a blank cheque. They say: “Trust us.” Yes, we can trust the administration – to give the taxpayers another raw deal.

You'd smile too if you could lose $821 million, and not only get bailed-out with no limits or accountability, but keep your job, and your enormous paycheck.

Syron made $10.6 million last year, according to Freddie Mac's latest report with the Securities and Exchange Commission. The company disclosed the information in a filing that clears the way for Freddie (FRE, Fortune 500) to raise $5.5 billion from investors to shore up its balance sheet.

...Syron made by far the biggest sum at the Reston, Va., company, pulling down a $1.2 million salary and a $3.45 million cash bonus, in addition to millions more in stock awards and other compensation for a total of $10.6 million.

Using a pay-disclosure measure that the SEC prefers, which treats the value of stock and options differently, Syron's pay for 2007 was $18.3 million, up 24% from a year ago.

If you were no smarter with your own finances than you are with your company's, you might have fewer reasons to smile if you didn't save some of that compensation package; several million less, if Congress'd had the temerity to say do anything about it.

But for now, you can just keep on smiling.